Measuring relative development level of stock markets: Capacity and effort of countries

One of the important determinants of economic development is the existence of an effective financial system. Despite widespread need for financial services, the range and depth of financial markets, including stock markets, vary significantly across countries. One question in the literature is how to measure the development level of stock markets across countries for appropriate policy formations. This paper suggests capacity and effort measures of stock market capitalization, which consider country characteristics, as diagnostic tool to assess the gap between the actual level of stock market capitalization and the capacity of countries. It involves a panel study of 104 developing and developed countries for the period of 1990e2012. The analysis can deliver broad guidance for public reforms in countries with various levels of market capitalization. Cross-country comparisons with measures considering country characteristics can give a better idea on the state of financial systems. Consequently, countries can be more accurately categorized based on different problems such as unsustainable expansions or shallow financial markets.